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Business Leadership and the Future of Markets: Helping “Capitalism Save Itself from Itself”


It seemed urgently timely, and strangely disorienting, for the Harvard Business School (HBS) Centennial Global Business Summit to engage the alumni who lead JP Morgan Chase and General Motors...

On the day when the federal government announced plans to inject $250 billion into United States banks—some of them unwilling recipients—and as presidential candidates discussed whether to lend and guarantee merely $25 billion, or perhaps twice that, to struggling Detroit automakers, it seemed urgently timely, and strangely disorienting, for the Harvard Business School (HBS) Centennial Global Business Summit to engage the alumni who lead JP Morgan Chase and General Motors, among other panelists, to discuss "Leadership for the Twenty-First Century" and "The Future of Market Capitalism." (This post is the third in a series from the summit; see also Financial Crisis: Confidence—and Some Cautions and Bill Gates on “Creative Capitalism”.)

LEADERSHIP FOR THE TWENTY-FIRST CENTURY. Chapman professor of business administration Nitin Nohria, the school's senior associate dean, moderated a panel [see video] consisting of James Dimon, M.B.A. ’82, chairman and CEO of JPMorgan Chase; Orit Gadiesh, M.B.A. ’77, chairman of Bain & Company; G. Richard Wagoner Jr., M.B.A. ’77, chairman and CEO of General Motors; and Jaime A. Zobel de Ayala II, M.B.A. ’87, chairman and CEO of Ayala Corporation (of the Philippines). Each described a formative management experience, and then turned to current events.

Managing in the current crisis. Leadership principles don't change, Dimon stressed, but a crisis shows how important it is to maintain an open environment where all members of a team can speak frankly and honestly, given the inevitable challenges and problems that arise in any organization. He cited the management wisdom of a cartoon to the effect of "We suck less" as a reminder to be prepared for inevitable shortcomings. In times of crisis, he said, leaders had to prioritize ruthlessly; he said he was shocked that even as a head-on collision with a fast train neared, people in other companies were going ahead with routine meetings, or working on their 2009 strategic plans; his approach was to cancel all of that and focus on the threat at hand.

And once problems are identified, he said, they had to be urgently addressed because "These problems don't age well." Thus, rather than fearing stockholders' wrath and deferring a day of reckoning, managements had to address problems or mistakes, get rid of bad assets or failed mergers, and move on. He was amazed, again, by the lack of focus and willingness to make decisions: "I'm always surprised at companies that don't have discipline" about their costs, competitors, people, or whatever urgent business need is at hand. Finally, he said, companies had to set their own high standards, from the CEO on down, and then live by them; given a standard for integrity, a CEO has to fire a top salesman who lies to a client, rather than rationalize and keep him on because of the sales volume.

Wagoner, invoking a traditional HBS classroom tactic, said, "I agree with everything he said." A crisis, he said, stops work on broader issues—advancing a new technology, rolling out a new product—and focuses attention on "unhealthy business practices" that have accumulated. "I'm elated at all the things we've fixed," Wagoner said, "or chagrined to see all the the dumb practices" the company had let go forward. With credit tight, GM had recognized that it was running an unprofitable leasing business in Canada, and dropped it. For all the "massive cuts" the company had been forced to make, once those were carefully explained to groups such as dealers, they were inclined to buy in to the resulting decisions, even if they did not enjoy them.

Communicating. Gadiesh said Wagoner's points about candor and communicating related to a fundamental condition of leadership, which she distinguished from being the "boss." Leaders, she said, got people to follow the direction they set because the followers wished to do so. Leaders win confidence through a mutual relationship, and so enlist subordinates' cooperation in moving forward—and they do so through repeated, clear, comprehensible explanations of what they are asking. In return, leaders can trust that subordinates, having enlisted, will act to carry out their responsibilities.

The challenge after the crisis. How would businesses and their leaders inspire confidence after the recent financial crisis? Nohria asked. Zobel said the United States had been fortunate, and had not suffered more frequent crises, such as the financial "flu" that shook Asia in 1997; but the Asian nations had responded strongly and successfully—suggesting that it is important to keep perspective through the acute period of crisis itself.

Dimon said his industry was already regulated heavily, and he expected more regulation. Some things needed to be fixed, and no doubt other actions would be taken because it was politically expedient to do so. One example he cited was excessive compensation; as he noted, "A lot of people made a lot of money who didn't deserve it." More broadly, he said, there needs to be regulation of excessive leverage, of arcane specialized investment vehicles that some banks used to keep risky assets off their regular books, and of mortgages themselves—an unregulated product, and the foundation of the real-estate mess, which, he noted, had been the cause not only of this panic, but of many previous financial crises in the United States. To assure that regulations let businesses serve both investors and customers, he said, CEOs had to be much more involved in Washington, not only as pleaders for special tax breaks, but also as advocates for policies that promote economic strength and long-term competitiveness generally.

That said, Dimon added, not all business people are crooks; and not all politicians are doing an exemplary job—particularly insofar as they define their work as doing the bidding of constituents who sometimes have no idea of reality.

Gadiesh asked, "Where are the grown-ups?"—suggesting that twenty-first-century businesses are being overseen by institutions created in the mid twentieth century, in the wake of the Great Depression and World War II—eons ago in terms of financial, business, and technological integration on a world scale.

Education for future leadership. What ought HBS do for its students? Nohria asked. Wagoner, recalling his early executive role in Brazil, strongly emphasized the importance of diversity in the student body, where students could assimilate different perspectives and seek common solutions.

Zobel advanced a five-part agenda: preparing students for far more complex operating environments, equipping them to operate in an interrelated world economy and providing them with historical perspective; refining the implicit, nascent social contract, emphasizing businesses' responsibilities beyond maximizing shareholder value; preparing for volatility ("Students must be aware that downturns do come"), so they don't get caught flatfooted or panic; revisiting the interrelationship of public and private sectors, as regulation returns to the business agenda after a long period of lessened public oversight; and, crucially, examining "a new way to look at the growth equation," since the current mania for increasing quarterly earnings puts companies and CEOs under intolerable, unrealistic pressure, and puts producers and consumers in an untenable situation of competing for scarce commodity resources.

Dimon embraced Zobel's point about CEOs being forced to do "dumb" things to sustain growth, even when economic conditions do not warrant it. "Growth is a disease in itself, and the CEO has to explain that" to shareholders sometimes. He paraphrased Warren Buffett to the effect that sometimes the smartest thing to do is to send the sales force to a golf course for the afternoon (rather than pressuring them to make risky or unprofitable deals).

At the same time, Dimon said, governments were afflicted by institutional "sclerosis" and cannot act even in light of clear, compelling rationales to do so. Energy supplies and pricing have been a priority since 1974, he said, but "we don't have the fortitude to tax oil, to tax BTUs" because it might mean Americans have to drive smaller cars, or replace windows, or get more efficient appliances. As a result, he said, "We deserve $4 gasoline," and given the lack of action after the newest price spike, "That train is going to hit us again" in the next 10 or 15 years. [Throughout the conference, many speakers referred to the economic and environmental imperatives of addressing energy problems, and were dismayed by America's inaction.] Businesses had had failures, to be sure, but "between their corruption and their stupidity and their playing to the crowds," political leaders had failed, too.

Wagoner, for whom gas taxes are a significant issue [versus, say, mandated automobile fuel-economy standards], agreed that without a fuel tax, the United States would have recurrent energy crises "until we run out of money." He said that businesses' involvements in Washington needed to be guided by "a little more statesmanship," rather than by individual companies' parochial interests.

Gadiesh suggested that HBS could do well by partnering with Harvard Kennedy School. Business and government leadership must not be separate, if societies are to address common social problems; rather, the goal is to train leaders who can cooperate. She focused on how energy had slipped completely off the agenda in the presidential campaign, and said the country could not afford to flit from priority to priority.

THE FUTURE OF MARKET CAPITALISM. Baker Foundation Professor Joseph L. Bower led a multimedia presentation on the progress of markets (when he enrolled in college in the 1950s, India meant "famine" and China was an enemy, he said) and their prospects looking ahead.

When he began the research two years ago, market capitalism had seemed an eternal "golden goose," spreading wealth to the horizon. That was no more the case than that the current crisis was the End of Days. Instead, he reviewed data from a World Bank forecast of the economy to 2030, using those projections to pose questions—for business leaders and educators alike—about how to respond to unequal distribution of wealth, environmental deterioration, the mismatch between international institutions and globally integrated economic activity, and other challenges to or side effects from the spread of market capitalism.

His data indicated that Africa continued to lag the rest of the world; that the gap between higher- and lower-income workers was widening (and that in areas where the gap was widest, economic growth did little to ameliorate it); that income differences promoted migrations, which entailed all sorts of political stresses, and put pressure on governments to provide education and work skills (needs which governments often could not meet). Some of the alumni filmed for the presentation worried about geopolitical conflicts as well, at traditional Asian flashpoints, for instance; about the conflict between state capitalism and market capitalism; and, of course, about the fallout from the current credit crisis.

Overall, Bower concluded, companies acting on their own do not do a good job of addressing social income inequality, migration, environmental fallout, or protectionism—nor was there confidence that governments were handling the problems adequately, either. Unaddressed, those problems posed serious challenges to market capitalism. CEOs operating within their organizations had clear authority to pursue their roles; but when they stepped into the public arena, they lacked that authority, and their legitimacy in that realm was often questioned. That seemed to pose large challenges to business and to business educators, for the future of capitalism in the twenty-first century.

Eliot University Professor Lawrence H. Summers—past Harvard president and U.S. Treasury secretary—delivered a keynote speech, echoing in many respects his current Harvard Magazine article, "The Economic Agenda," but updated for the traumatic market developments of September and early October [see video]. He addressed three principal issues: the need to maintain the conditions for stable prosperity and growth; the need to secure legitimacy by making sure that the benefits of market capitalism and global economic integration are widely shared; and the need to build a global system that works for all. The backdrop, he said—taking note of the HBS surroundings—was that this was "a period of abnormally high disillusionment with elites" as measured by polls showing respondents' fear for their own prospects and their children's, and their low regard for leaders in business and government. It is important, therefore, that choices be made and actions taken that restore some faith in the system at large.

On the current economic situation and the threat to stability and prosperity, Summers saw five vicious cycles operating at once: of liquidation (as forced asset sales lower prices and force further sales); of deleveraging (as institutions lacking capital sell assets, prices drop, more losses are realized, and capital is further impaired); of the "credit accelerator" (as a weakening economy impairs credit quality and reduces the flow of lending); of the Keynesian economic cycle (as lower spending causes jobs to decline, reducing incomes and in turn further curtailing spending); and of panic (as rumors about institutions' financial situation causes bank runs). Whatever the tactics, he said, firm, decisive action was required, and appears to have been taken with the recent loan guarantees and deposit insurance, federal capitalization of banks, and even direct provision of credit in the commercial paper market—all legitimate aspects of the government's role as guarantor of stability.

Beyond that, the health of the financial system is tied to the health of the broader economy, where some further steps—tax cuts, infrastructure spending, or both—may be required over the next year or two.

Fundamentally, it is apparent that the market system both encourages flexibility and the creation of prosperity, and induces frequent crises, extending back to the 1987 crash, the savings and loan debacle and commercial real-estate bust, the Mexican and Asian financial crises of the late 1990s, Long Term Capital Management's collapse in 1998, the bubble, the Enron crisis of corporate governance [see “Felonious Mayhem”], and now the current credit crisis, the most severe of all—too many in too short a time. The focus of regulation has to shift, Summers said, from prudential oversight of individual institutions to systemic approaches that address the stability of the financial system as a whole. That the failure of the Lehman Brothers investment bank could jeopardize the entire financial network shows how great the need is, and how far we are from having appropriate structures in place. A debate over what to do should occur, but not over the need to change the system now in place. Without assurance of stability and prosperity and growth, nothing else would be possible.

That brought Summers to the issue of fairness and the distribution of the rewards of growth. He cited growing income inequality in the United States, widening differences in health between those well off and the poor, and the stalling out of economic progress from generation to generation. These trends, he said, all undercut the political legitimacy of market capitalism. Education surely betters the lot of those still being schooled, but it no longer can reach those aged 30 and above whose livelihoods are threatened both by global competition and by governmental inability to fund retraining—or even by governmental willingness, for competitive reasons, to lower taxes for high-skilled, high-income earners (who might relocate or move their businesses to other jurisdictions), and to raise them for the less fortunate. Summers called this a "devastating syllogism." Global economic integration, he said, surely provided opportunities for business, but it must also "work for workers" by providing them opportunities, too.

Finally, he said the credit crisis raised anew the question about America's role in the world. A decade ago, the country was the unquestioned leader in military strength—a position now challenged by the situation in Afghanistan and elsewhere. Its moral authority, and appeal to people from throughout the world, was undercut by Guantánamo, Abu Ghraib, and Hurricane Katrina. And its economic leadership was under serious question. So the nation needs to learn how to work with others to deal with challenges such as energy (where the largest flows of capital in history are now taking place, from democracies to less democratic oil states—with consequences that could not be foreseen).

Taking his themes together, Summers, said, people who "once felt secure" in their homes and families, their livelihoods, their nations, and the world, do not feel secure any longer. They feel remote from the world of finance, and unsure that they are making progress in the world market system. Unless they are made to feel a part of the benefits the system provides, it is in danger. In the past, Republican and Democratic Roosevelts had, in the United States, helped "capitalism save itself from itself," during the problems of 1907-1908 and then the Great Depression. The challenge was to do so again, in a "much smaller world than we have ever had before," but one that promised huge opportunities to create more prosperity and better the lives of more people than ever before.

Summers then joined a panel [see video] moderated by Lawrence University Professor Michael E. Porter; Thierry J. Breton, former minister of Economy, Finance, and Industry in France and a former manufacturing executive, now a senior lecturer at HBS; and Sir Ronald M. Cohen, M.B.A. ’69, founding partner of Apax Partners, a large private-equity firm, and now a leader in social investment and entrepreneurship in England.

Porter outlined "an agonizing dilemma," in that only businesses can create wealth; vibrant market economies are needed to address social challenges; but the consequences of market capitalism create fear, inequality, and political resistance—all of them made even worse by globalization (insofar as it is perceived, for example, as shattering the American industrial worker's financial security). It had proved hard to provide training and new skills to the affected workers, as Summers noted. Left unaddressed, the rising strains posed threats to market capitalism itself. So the panel would explore what businesses and HBS could do, in the immediate circumstances and longer term.

The roots of anger. Cohen said he had seen private equity investments create real wealth—and contribute to rising inequality. He focused on social entrepreneurship—investing in underserved populations and markets, empowering them economically—as coming of age, as private entrepreneurship had during the past three decades. In the credit crisis, if U.S. homeowners were left to fend for themselves, what would happen if 10 percent of them lost their homes; in a recession, what if the unemployed, those who lost savings, and all who suffered from the coming inflation were left to their own devices? If we fail to "palliate the social consequences for whole swathes of our population," Cohen said, a backlash was inevitable.

Breton said people were relieved that the crisis was being addressed, but mad about the government rescues required. He had spoken with French fishermen who lost their boats when high fuel prices put them out of business; they weren't rescued, and now they were being asked to absorb bank rescues that cost billions of euros. Their political leaders, he said, would want that money back and were in a tough regulatory mood. HBS wisely taught future business leaders about stakeholders, not just shareholders.

Porter thought the system was being questioned even before the crisis. Breton said in France, voters aspired to a better future for their children, but saw spending on education and healthcare absorbed by the need to service past public debts. The rescue measures alone would balloon U.S. public debt perhaps 30 percent, and European public debt 5 to 120 percent. Cohen saw business leaders as losing integrity during a period of prosperity, when top managers made huge sums but others did not. We need, he said, "to address social issues in the same professional ways we do business ones."

The need for policy changes. Summers praised social entrepreneurship, and such exemplary work as charter schools. But he felt that necessary though such single examples were, broader, systemic—policy—measures were required, in areas such as healthcare or education. Business leaders needed to engage in broad policy questions, not merely come to Washington (as had been his experience in the Treasury Department) to seek tax breaks or benefits for their companies. [See Wagoner's comments, above, on this same point.]

Porter saw a need to proceed on both tracks: social entrepreneurship [see "M.B.A.s Talk Trash," on inner-city enterprise, for an initiative in which Porter has been involved for many years] and policymaking. He noted that in Massachusetts, the business community had fought against having to contribute any funds to the Commonwealth's universal healthcare reform, and thus had been in the position of opposing a solution to systemic problems, such as delivery of healthcare or education.

Executive compensation. Turning to executive pay, as a flashpoint for the public, Porter asked the panel about their views. Certainly with governments propping up banks, there will be regulations on pay. Are the only alternatives confiscatory taxation or Bill Gates-style philanthropy? Might social entreprenership be a third path: proof that "we can add a multiplier on what traditionally was just philanthropy" by applying business funds, disciplines, and skills, beyond merely writing checks?

Breton saw businesses starved for equity capital, and so engaging in long-term public-private partnerships to finance themselves, with social benefits, but also limits on compensation.

Summers doubted that regulating compensation was a good idea. But he did suggest that it ill-behooved CEOs making 350 times as much as their lowest-paid workers to argue that raising the top tax rate from 35 percent to 39 percent somehow meant the end of capitalism. Market systems, he said, depended on non-market institutions such as progressive taxation. If HBS alumni were surveyed about their prospects if they were fired, he guessed, they would have income for 12 months or so; but the people who drove their cars or cleaned their buildings would get weeks of income, if that. "The people who least need insurance against bad outcomes get most of it," he said—a situation that had to be reversed.

The frayed social safety net. More generally, Porter said, the American safety net had failed utterly. As jobs are created and destroyed, workers lose access to healthcare, their pensions, severance pay, and training. That has to change if capitalism is to remain viable. He suggested, as a minimum, that all agree, voluntarily, to abolish golden parachutes—executive exit pay, whether merited or not.

Does business have a responsibility to the poor, those who don't prosper? Porter asked. Cohen said, "Markets deal with their economic consequences, not their social consequences," and government interventions—welfare, charity—induce moral hazard. People want private economic opportunity. Breton urged action, since the public response to the financial rescue and prospective reaction "will happen very quickly," with an impact lasting decades. Summers focused not on the poor—who require charity—but on the middle class, whose broad anxieties are pressing. He saw many business opportunities—to save energy, to train workers in English, to locate jobs where there are jobless people—that would be economically justified, and would provide huge social benefits. Those opportunities to do good while doing well were his first priority.

Porter said it was indeed pressing to "elevate" thinking about capitalism beyond the current crisis, to take a clear view of the prospects for capitalism itself. All, he said, would have to "shift and widen and texture our perspectives" in the future.